Attached files
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EXCEL - IDEA: XBRL DOCUMENT - American Realty Funds Corp | Financial_Report.xls |
EX-31 - EXHIBIT 31.1 - CERTIFICATION - American Realty Funds Corp | arfc123111q_ex31z1.htm |
EX-31 - EXHIBIT 31.2 - CERTIFICATION - American Realty Funds Corp | arfc123111q_ex31z2.htm |
EX-32 - EXHIBIT 32.2 - CERTIFICATION - American Realty Funds Corp | arfc123111q_ex32z2.htm |
EX-32 - EXHIBIT 32.1 - CERTIFICATION - American Realty Funds Corp | arfc123111q_ex32z1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended: December 31, 2011 | ||
Or | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: 000-54431 | ||
| ||
American Realty Funds Corporation | ||
(Exact name of registrant as specified in its charter) | ||
| ||
Tennessee | 27-1952547 | |
(State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) | |
|
| |
501 S. Euclid Avenue | 48706 | |
(Address of principal executive offices) | (Zip Code) | |
|
| |
800-613-3250 | ||
(Registrants telephone number, including area code) | ||
| ||
(Former name, former address and former fiscal year, if changed since last report) | ||
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,098,713 shares of common stock as of February 14, 2012.
American Realty Funds Corporation
Table of Contents
| Page |
|
|
PART I FINANCIAL INFORMATION | 1 |
Item 1. Financial Statements:. | 2 |
Balance Sheets (unaudited) | 2 |
Statements of Operations (unaudited) | 3 |
Statements of Cash Flows (unaudited) | 4 |
Notes to Financial Statements (unaudited) | 5 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 |
Item 3. Quantitative and Qualitative Disclosure About Market Risk | 13 |
Item 4. Controls and Procedures | 13 |
PART II OTHER INFORMATION | 15 |
Item 1. Legal Proceedings. | 15 |
Item 1A. Risk Factors. | 15 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
Item 3. Defaults Upon Senior Securities | 15 |
Item 4. Mine Safety Disclosures | 15 |
Item 5. Other Information. | 15 |
Item 6. Exhibits | 16 |
SIGNATURES | 17 |
ii
PART I FINANCIAL INFORMATION
Forward-Looking Information
This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as anticipate, estimate, plan, project, continuing, ongoing, expect, we believe, we intend, may, should, will, could and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
Examples of forward-looking statements include:
·
the timing of the development of future products;
·
projections of costs, revenue, earnings, capital structure and other financial items;
·
statements of our plans and objectives;
·
statements regarding the capabilities of our business operations;
·
statements of expected future economic performance;
·
statements regarding competition in our market; and
·
assumptions underlying statements regarding us or our business.
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A Risk Factors contained in the Companys Registration Statement on Form S-11. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
1
Item 1.
Financial Statements
American Realty Funds Corporation
Balance Sheets
|
|
| December 31, |
|
|
|
|
|
| 2011 |
| June 30, |
|
|
|
| (unaudited) |
| 2011 |
|
|
|
|
|
|
|
|
Assets | ||||||
|
|
|
|
|
|
|
Investment in real estate assets: |
|
|
|
|
| |
Real estate subject to land contracts, less accumulated |
|
|
|
|
| |
depreciation of $2,606 and $1,900, respectively |
| $ 81,642 |
| $ 516,268 |
| |
Inventory of real estate |
| 1,411,320 |
| 28,469 |
| |
Total investment in real estate assets, net |
| 1,492,962 |
| 544,737 |
| |
Cash and cash equivalents |
| 136,994 |
| 6,986 |
| |
Prepaid and other current assets |
| - |
| 23,444 |
| |
Due from shareholders |
| 319,907 |
| - |
| |
Fixed assets, less accumulated |
|
|
|
|
| |
depreciation of $4,428 and $4,115, respectively |
| - |
| 313 |
| |
| Total assets |
| $ 1,949,863 |
| $ 575,480 |
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity | ||||||
|
|
|
|
|
|
|
Due to shareholders |
| $ - |
| $ 25,285 |
| |
Notes payable |
| 1,483,964 |
| - |
| |
Accrued liabilities |
| 36,062 |
| 6,321 |
| |
Deposit liabilities |
| 82,745 |
| 150,900 |
| |
| Total liabilities |
| 1,602,771 |
| 182,506 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
| |
|
|
|
|
|
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Series A preferred stock, $10 par value, 10,000,000,000 shares |
|
|
| |||
authorized, 0 shares issued and outstanding |
| - |
| - |
| |
Series A preferred stock, no par value, 90,000,000,000 shares |
|
|
| |||
authorized, 0 shares issued and outstanding |
| - |
| - |
| |
Common stock, $0.001 par value, 100,000,000 shares |
|
|
|
|
| |
authorized, 10,098,713 shares issued and outstanding |
|
|
|
|
| |
at December 31, 2011 and June 30, 2011. |
| 10,099 |
| 10,099 |
| |
Paid-in capital |
| 1,129,015 |
| 1,129,015 |
| |
Accumulated deficit |
| (792,022) |
| (746,140) |
| |
| Total shareholders' equity |
| 347,092 |
| 392,974 |
|
|
|
|
|
|
|
|
| Total liabilities and shareholders' equity |
| $ 1,949,863 |
| $ 575,480 |
|
See accompanying notes to the financial statements.
2
American Realty Funds Corporation
Statements of Operations
|
|
| Three Months Ended December 31, |
| Six Months Ended December 31, | ||||
|
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
|
|
|
|
|
|
|
|
|
Net revenues | $ - |
| $ - |
| $ 52,387 |
| $ - | ||
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
| ||
| Salaries | 25,884 |
| 21,000 |
| 47,815 |
| 42,000 | |
| Professional fees | - |
| 11,505 |
| 5,000 |
| 16,283 | |
| Commission and fees | - |
| 11,550 |
| 575 |
| 11,550 | |
| Depreciation | 706 |
| 2,365 |
| 1,724 |
| 3,158 | |
| Other operating expenses | 8,850 |
| 2,166 |
| 10,350 |
| 3,766 | |
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses | 35,440 |
| 48,586 |
| 65,464 |
| 76,757 |
|
|
|
|
|
|
|
|
|
|
Operating loss | (35,440) |
| (48,586) |
| (13,077) |
| (76,757) | ||
Other income (expense): |
|
|
|
|
|
|
| ||
| Interest expense | (36,540) |
| - |
| (38,960) |
| - | |
| Other income (expense), net | (369) |
| (440) |
| (21,044) |
| (536) | |
Total other income (expense) | (36,909) |
| (440) |
| (60,004) |
| (536) | ||
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision | (72,349) |
| (49,026) |
| (73,081) |
| (77,293) | ||
Income tax provision | - |
| - |
| - |
| - | ||
Net loss | $ (72,349) |
| $ (49,026) |
| $ (73,081) |
| $ (77,293) | ||
|
|
|
|
|
|
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|
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Net loss per share: |
|
|
|
|
|
|
| ||
| Basic | (0.01) |
| - |
| (0.01) |
| (0.01) | |
| Diluted | (0.01) |
| - |
| (0.01) |
| (0.01) | |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
| ||
| Basic | 10,098,713 |
| 10,091,920 |
| 10,098,713 |
| 9,537,282 | |
| Diluted | 10,098,713 |
| 10,091,920 |
| 10,098,713 |
| 9,537,282 |
See accompanying notes to the financial statements.
3
American Realty Funds Corporation
Statements of Cash Flows
|
| Six Months Ended December 31, | ||
|
| 2011 |
| 2010 |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
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Net loss |
| $ (73,081) |
| $ (77,293) |
Adjustments to reconcile net loss to net cash used in |
|
|
|
|
operating activities: |
|
|
|
|
Depreciation |
| 1,724 |
| 3,158 |
Gain on sale of land contract interests |
| 20,614 |
|
|
Changes in assets and liabilities: |
|
|
|
|
Prepaid and other current assets |
| 23,444 |
| (953) |
Accrued liabilities |
| 29,741 |
| - |
Deposit liabilities |
| 35,644 |
| 18,876 |
Purchase and development of real estate properties |
| (1,382,851) |
| (524,855) |
Net cash used in operating activities |
| (1,344,765) |
| (581,067) |
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
Proceeds from sale of land contract interests |
| 336,000 |
| - |
Purchase of fixed assets |
| - |
| (4,428) |
Net cash provided by (used in) financing activities |
| 336,000 |
| (4,428) |
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
Proceeds from notes payable |
| 1,484,500 |
| - |
Payments on notes payable |
| (536) |
| - |
Due to/from shareholders, net |
| (345,193) |
| 1,790 |
Proceeds from issuance of common stock |
| - |
| 598,994 |
Net cash provided by financing activities |
| 1,138,771 |
| 600,784 |
|
|
|
|
|
Change in cash and cash equivalents |
| 130,006 |
| 15,289 |
|
|
|
|
|
Cash and cash equivalents, Beginning of period |
| 6,986 |
| 5,000 |
|
|
|
|
|
Cash and cash equivalents, End of period |
| $ 136,994 |
| $ 20,289 |
|
|
|
|
|
Noncash Financing and Investing Activities: |
|
|
|
|
Capital Contribution |
| $ 27,199 |
| $ - |
Proceeds from sale of land contract interest recorded in deposit liabilities |
| $ 76,600 |
| $ - |
See accompanying notes to the financial statements.
4
American Realty Funds Corporation
Notes to Financial Statements
December 31, 2011
(Unaudited)
Note 1:
Background and Basis of Presentation
American Realty Funds Corporation (the Company) was incorporated on February 22, 2010 (Date of Inception) in the State of Tennessee. The Company focuses on acquiring, renovating and reselling residential real estate.
The accompanying unaudited financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal and recurring adjustments considered necessary for a fair statement, have been included. The reported results of operations are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the audited financial statements and accompanying notes for the fiscal year ended June 30, 2011.
Note 2:
Going Concern and Operations
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred losses, has had negative operational cash flows since inception, and has had minimal revenues. The future of the Company is dependent upon future profitable operations and the development of the business plan.
These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.
Note 3:
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash consists of balances on deposit with domestic banks.
Inventory- Residential Properties
Pre-renovated residential properties acquisitions, materials, other direct costs, interests and other indirect costs related to acquisition and renovation of the real estate properties are capitalized. A flat renovation fee per property is charged by Diversified Group Partnership Management, LLC ("DGPM") which is owned by the Companys Co-Chief Executive Officers Joel Wilson and Michael Kazee to the Company. The fee is based on the average renovations DGPM performs on a home and is prorated if renovations on a property are not complete as of the end of the period. Capitalized costs of residential properties which are held for sale are recorded at the lower of its carrying amount or fair value less cost to sell. Other costs like marketing, etc. incurred in connection with renovated real estate properties and other selling and administrative costs are charged to earnings when incurred. If the Company has a continuing obligation to complete renovations subsequent to the sale of the property, an estimate of the costs to complete are charged to cost of sales with a corresponding liability at the time of sale.
Revenue Recognition
Sales of the Companys real estate property occurs through the use of a sales contract where revenues from renovated real estate property sales is recognized upon closing of the sale. In accordance with Accounting Standard
5
360 Property, Plant, and Equipment, Issue 20 Real Estate Sales (AS 360-20), the Company uses the accrual method and recognizes revenue on the sale of its renovated properties when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured, which is typically when the sale of the property closes.
The Company sells most of its real estate properties through land contracts where the Company conveys to the purchaser real estate by a warranty deed if the purchaser pays a down payment on the delivery of the contract and pays the remaining sales amount over 30 years at a specified interest rate. During the time when payments are made, the purchaser has use of the real estate. In the event of a default by the purchaser, the Company may void the contract and the property and all the payments made under the contract would be forfeited to the Company as rental for the use of the real estate and the Company may declare all amounts remaining unpaid under the contract due and payable. In accordance with AS 360-20, the Company accounts for these Land Contract sales under the deposit method as the Company does not transfer to the purchaser all the risk and rewards of ownership of the real estate upon the sale of the property. For a sale under the deposit method, the Company does not initially record a profit on the sale, does not record a notes receivable, continues to carry the property as an asset on it financial statements, and will recognize the down payment and subsequent monthly payments as a Deposit liability.
In accordance with AS 360-20, the Company recognizes profit on these land contracts when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured. This will typically occur when the purchase price and all interest is paid in full and legal title to the property has transferred to the purchaser.
The Company also enters into sales of land contract interests where the Company transfers and delivers to the purchaser full interest in the land contracts noted above, including the transfer of full and legal title to the underlying properties and the right to receive the future payments made under the land contract.
In accordance with AS 360-20, the Company recognizes profit on these sales of land contract interests when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured. This typically occurs when the purchase price and is paid in full and legal title to the property has transferred to the land contract interest purchaser. Additionally, when the earnings process is complete, any down payments and monthly land contract income previously received and recorded as a deposit liability is recognized as revenue. Any down payment or monthly land contract income received and recorded as a deposit liability that was borrowed from a related party is recorded as an equity recapitalization.
Net Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. As the Company is in a net loss position, there are no outstanding potentially dilutive securities that would cause diluted earnings per share to differ from basic earnings per share.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
6
Note 4:
Investment in Real Estate Assets
Investment in real estate assets consist of residential properties held for sale and subject to land contracts.
During the three months ended December 31, 2011, the Company acquired 41 properties for $724,433 and incurred renovation costs totaling $409,574. During the six months ended December 31, 2011, the Company acquired 48 properties for $814,246 and incurred renovation costs totaling $597,074. There were no sales of properties held for sale.
In April 2011, the Company entered into three agreements for the sale of land contract interests. The Company, upon full payment of the purchase price of the agreements, which final payments occurred in August 2011, transferred and delivered to the purchaser full interest in nine land contracts, including the transfer of full and legal title to the underlying nine properties and the right to receive the future payments made under the land contract. The purchasers in all three agreements were limited partnerships, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company. No amounts under the agreement were paid by The Diversified Group Partnership Management, LLC. In August 2011, the total installment payments received of $412,600 was recognized as other income and the carrying value of the underlying properties of $433,214 was recorded as other expense. Additionally, a deposit liability of $52,387 consisting of down payments and monthly land contract payments previously received under the land contracts was recognized as revenue and a deposit liability of approximately $27,199 consisting of down payments received by the land contract purchaser that were borrowed from a related party was treated as a capital contribution.
As of December 31, 2011 the Company held two properties subject to land contracts with a carrying value of $81,642, which have been reclassified from the Companys inventory of real estate and is depreciated over life of 30 years. As of December 31, 2011, the Company has received payments that have been recorded as a deposit liability totaling $13,004.
In August 2011, the Company entered into another agreement for the sale of land contract interests in their two remaining properties subject to land contracts. The Company, upon full payment of the purchase price of the agreement, agreed to transfer and deliver to the purchaser full interest in two land contracts, including the transfer of full and legal title to the underlying two properties and the right to receive the future payments made under the land contract. As of December 31, 2011, full payment had been received but title to the properties was not passed to the purchaser so the Company retained the properties. The purchaser in the agreement was a limited partnership, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company. No amounts under the agreement were paid by The Diversified Group Partnership Management, LLC. As of December 31, 2011, the Company held a deposit liability of $69,741 relating to payments received under the agreement. When title to the underlying properties is transferred to the purchaser, the agreement payments will be recognized as other income and the carrying value of the underlying properties of approximately $82,000 will be recorded as other expense. Additionally, a deposit liability of approximately $9,000 consisting of down payments and monthly land contract income previously received under the land contracts will be recognized as revenue and a deposit liability of $3,610 consisting of down payments received by the land contract purchaser that were borrowed from a related party will be treated as a capital contribution.
Note 5:
Notes Payable
In September 2011 the Company entered into separate promissory notes with The Diversified Group Land Contract Limited Partnership # 5 (LCLP #5) and The Diversified Group Land Contract Limited Partnership # 6 (LCLP #6) for $300,000 and $250,000, respectively. LCLP #5 and LCLP #6 both consist of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who are not related parties to the Company and are not parties in any other Company agreements. No amounts under the promissory notes were paid by The Diversified Group Partnership Management, LLC. Each note has an interest rate of 9.9% and a term that ends in December 2011. Monthly payments are required with a final balloon payment due at the end of the loan term. Additionally, in October 2011 the promissory notes were amended to extend the due date of the final balloon payment to June 2012.
7
In October 2011 the Company entered into the following separate promissory notes:
Note Description |
| Amount |
| Rate |
| Due Date |
The Diversified Group Land Contract Limited Partnership #7 (LCLP#7) |
| 237,500 |
| 13.68% |
| 6/1/2012 |
The Diversified Group Land Contract Limited Partnership #8 (LCLP#8) |
| 247,000 |
| 11.13% |
| 6/1/2012 |
The Diversified Group Land Contract Limited Partnership #9 (LCLP#9) |
| 450,000 |
| 11.13% |
| 6/1/2012 |
Each promissory note consists of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who are not related parties to the Company and are not parties in any other Company agreements. No amounts under the promissory notes were paid by The Diversified Group Partnership Management, LLC. Monthly payments are required with a final balloon payment due at the end of the loan term.
As of December 31, 2011, the Company made one monthly payment against LCLP#5, LCLP#6 LCLP#7, LCLP#8, and LCLP#9. Interest expense for the three and six months ended December 31, 2011 was $36,540 and $38,960, respectively.
Note 6:
Income Taxes
Since inception the Company has been in a cumulative net loss position. The Company had net operating loss carry forwards at December 31, 2011 of $819,953 which expire beginning in 2030. The Company has provided a full valuation allowance for all deferred tax assets because of the uncertainty regarding the utilization of the net operating loss carryforwards.
Note 7:
Shareholders Equity
On February 6, 2012 the Company filed with the Securities Exchange Commission form S-11 for the registration of their Series A Preferred Stock, $10 par value. The amount of shares to be registered is 2,500,000 at for a proposed maximum offering share price of $10 per share.
Related Party Transactions
The Company entered into a sublease agreement with the Companys shareholders to occupy their current facility. The agreement expires July 1, 2012 and requires the Company to pay rent of $500 per month. The Company also made improvements to facilities owned by the majority shareholder totaling $4,428 that were capitalized as part of property and equipment and were fully depreciated as of December 31, 2011.
The Company entered into real estate sales contracts with DGPM to purchase residential real estate properties. During the three and six months ended December 31, 2011 the Company paid DGPM $0 and $8,445, respectively for one residential property.
The Company uses DGPM to perform certain renovations on the Companys properties. During the three and six months ended December 31, 2011, DGPM performed renovations services of $409,574 and $582,074 on properties the Company owned. These amounts have been allocated to individual properties and included in investments in real estate assets. The labor and materials is a flat fee per property and is based on the historical average renovations DGPM performs on a home. Any amount paid by the Company to DGPM that is in excess of renovations performed is recognized as due from shareholders on the balance sheet.
The Companys shareholders paid for Company-related expenses during the three and six months ended December 31, 2011. Such amounts are recognized as amounts due to shareholders on the balance sheet. These amounts are payable on demand and are non-interest bearing.
The Company entered into four agreements for the sale of land contract interests. The purchasers in all four agreements were limited partnerships, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company (see Note 4: Investment in Real Estate Assets).
8
As of December 31, 2011, the Company entered into promissory notes with five limited partnerships, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company (see Note 5: Notes Payable).
Note 9:
Commitments and Contingencies
The Company may from time to time be involved in legal proceedings arising from the normal course of business. There are no pending or threatened legal proceedings as of December 31, 2011.
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Except for the historical information contained in this report on Form 10-Q, the matters discussed herein are forward-looking statements. Words such as anticipates, believes, expects, future, and intends, and similar expressions are used to identify forward-looking statements. These and other statements regarding matters that are not historical are forward-looking statements. These matters involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed below as well as those discussed elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission on September 28, 2011.
Background Overview
We purchase, renovate and resell residential real estate in the United States. We typically sell our properties under a land contract to buyers who do not have sufficient cash to purchase a property outright and are unable to obtain mortgage financing from third-parties. In a typical land contract transaction, we receive a negotiated amount of the purchase price upfront and the remaining portion in monthly installments. There is substantial risk that we enter into transactions with buyers who are unable to make their monthly payments as planned. In the event a buyer defaults on their agreement with us, we may decide to evict any occupants, repair the property and sell it again. There would be substantial costs involved with each eviction, renovation and resale. If buyers are unable to pay us the amount agreed and when agreed, we would be negatively impacted to an unknown extent, which would negatively impact our cash flow and ability to continue as a going concern.
The Company also enters into sales of land contract interests where the Company transfers and delivers to the purchaser full interest in the land contracts noted above, including the transfer of full and legal title to the underlying properties and the right to receive the future payments made under the land contract.
We initially raised $598,994 in a private placement which closed on October 4, 2010. As of December 31, 2011, we owned 48 residential real estate properties in Michigan with an initial cost basis of $814,246 and renovations costs of $597,074.
In April 2011, interests in nine of our land contracts were sold to an entity controlled by our Co-Chief Executive Officers and the land contract interest purchaser is now entitled to receive the future monthly payments stated in the land contract agreement. Additionally, in August 2011 we entered into a similar agreement, which was not finalized as of December 31, 2011, to sell interests in our two remaining land contracts.
In September 2011, the Company entered into two promissory notes with an entity controlled by our Co-Chief Executive Officers and received $550,000. The promissory notes are at an interest rate of 9.9% and are due June 2012.
In October 2011, the Company entered into three promissory notes with an entity controlled by our Co-Chief Executive Officers and received $934,500. The promissory notes have interest rates that range from 11.13% to 13.68% and are due June 2012.
Our officers have entered into material agreements with entities they control and will continue to do so in the future, which could result in decisions adverse to our general stockholders. Our Co-Chief Executive Officers, Joel Wilson and Michael Kazee, have executed several agreements between us and companies under their control. These related party agreements contained significant conflicts of interest. Additional information relating to these and other related party transactions and conflicts of interest is contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission on September 28, 2011.
Our officers intend to enter into related party agreements in the future where significant conflicts of interest may exist. The interests of our officers differ from the interests of other stockholders and their decisions may
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negatively impact the value of your investment. Our officers may earn a profit from related party transactions while our investors may lose their entire investment.
Results of Operations
For the three and six months ended December 31, 2011, we generated revenues of $0, and $52,387, respectively, on payments received from our properties subject to land contracts. For the three and six months ended December 31, 2011 we incurred a net loss of $72,349 and $73,081, respectively. Our net loss for the three months ending December 31, 2011 was primarily attributable to our operating expenses which include salaries and professional fees of $25,884 interest expense on our promissory notes of $36,540. Our net loss for the six months ending December 31, 2011 was primarily attributable to our operating expenses which include salaries and professional fees of $52,815 and interest expense on our promissory notes of $38,960.
For the three and six months ended December 31, 2010, we generated no revenues and had a net loss of $49,026 and $77,293, respectively, which was primarily attributable to salaries expense, professional fees and other operating expenses.
The results of operations for the three and six months ended December 31, 2011 are not indicative of the results for any future interim period. We expect to considerably increase our operating expenses in the future, particularly expenses in sales, marketing, travel and general working capital. Although we anticipate generating operating cash flows in 2012, we do not expect to generate income due to the accounting required under land contracts (see Revenue Recognition below).
Critical Accounting Policies
The summary of critical accounting policies below should be read in conjunction with the Companys accounting policies included in Note 3 to the financial statements of the Company. We consider the following accounting policies to be the most critical:
Investment in Real Estate Assets
Inventory- Residential Properties
Pre-renovated residential properties acquisitions, materials, other direct costs, interests and other indirect costs related to acquisition and renovation of the real estate properties are capitalized. A flat fee per property is charged by Diversified Group Partnership Management, LLC ("DGPM") which is owned by the Companys Co-Chief Executive Officers Joel Wilson and Michael Kazee to the Company. The fee is based on the average renovations DGPM performs on a home and is prorated if the renovations on a property are not complete as of period end. Capitalized costs of residential properties which are held for sale are recorded at the lower of its carrying amount or fair value less cost to sell. Other costs like marketing, etc. incurred in connection with renovated real estate properties and other selling and administrative costs are charged to earnings when incurred. If the Company has a continuing obligation to complete renovations subsequent to the sale of the property, an estimate of the costs to complete are charged to cost of sales with a corresponding liability at the time of sale.
Real Estate Subject to Land Contracts
Residential properties that are sold under Land Contracts are removed from our inventory of real estate and depreciated on a straight-line basis over the term of the Land Contract.
Revenue Recognition
Sales of the Companys real estate property will occur through the use of a sales contract where revenues from renovated real estate property sales will be recognized upon closing of the sale. In accordance with FASB ASC 360-20, the Company will use the accrual method and recognize revenue on the sale of its renovated properties when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured, which is typically when the sale of the property closes.
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The Company anticipates selling most of its real estate properties through Land Contracts where the Company conveys to the purchaser real estate by a warranty deed if the purchaser pays a down payment on the delivery of the contract and pays the remaining sales amount over 30 years at a specified interest rate. During the time when payments are made, the purchaser has use of the real estate. In the event of a default by the purchaser, the Company may void the contract and the property and all the payments made under the contract would be forfeited to the Company as rental for the use of the real estate and the Company may declare all amounts remaining unpaid under the contract due and payable. In accordance with FASB ASC 360-20, the Company will account for these Land Contract sales under the deposit method as the Company does not transfer to the purchaser all the risk and rewards of ownership of the real estate upon the sale of the property. For a sale under the deposit method, the Company will not initially record a profit on the sale, will not record a notes receivable, will continue to carry the property as an asset on it financial statements, and will recognize the down payment and subsequent monthly payments as a deposit liability.
In accordance with FASB ASC 360-20, the Company will recognize profit on these land contracts when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured. This will typically occur when the purchase price and all interest is paid in full and legal title to the property has transferred to the purchaser.
The Company also enters into sales of land contract interests where the Company transfers and delivers to the purchaser full interest in the land contracts noted above, including the transfer of full and legal title to the underlying properties and the right to receive the future payments made under the land contract.
In accordance with AS 360-20, the Company recognizes profit on these sales of land contract interests when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured. This typically occurs when the purchase price and is paid in full and legal title to the property has transferred to the land contract interest purchaser. Additionally, when the earnings process is complete, any down payments and monthly land contract income previously received and recorded as a deposit liability is recognized as revenue. Any down payment or monthly land contract income received and recorded as a deposit liability that was borrowed from a related party is recorded as an equity recapitalization.
Liquidity and Capital Resources
Net cash used by operating activities increased approximately $764,000, or 131%, to ($1,344,765) for the six months ended December 31, 2011, compared to ($581,067) for the six months ended December 31, 2010. The increase of cash used by operating activities was attributable to an increase in purchases and development of real estate properties of approximately $858,000.
Net cash provided by (used in) in investing activities was $336,000 and $(4,428) during the six months ended December 31, 2011, and 2010, respectively. Net cash provided by investing activities for the six months ended December 31, 2011 consisted of proceeds from the sale of land contracts. Net cash used in investing activities for the six months ended December 31, 2010 consisted of investments in leasehold improvements.
Net cash provided by financing activities was $1,138,771 and $600,784 during the six months ended December 31, 2011 and 2010, respectively. Net cash provided by financing activities for the six months ended December 31, 2011 came from promissory note proceeds of $1,484,500, offset by payments on promissory notes of $536 and advances to shareholders of $345,192. Net cash provided by financing activities for the six months ended December 31, 2010 came from the proceeds of the issuance of common stock of $598,994, increased by advances from shareholders of $1,790.
Most of our cash has come from the issuance of shares in a private placement which closed on October 4, 2010 in which we raised $598,994, the sale of interests in nine of our land contracts in which we received $412,000, and promissory note in which we received $1,484,500. Both the sale of land contract interests and promissory notes involved entering transactions with entities controlled by our Co-Chief Executive Officers.
Over the next 12 months, we anticipate needing at least $600,000 to acquire, renovate and sell other properties and for other operating expenses. We are totally dependent on external sources of financing for the foreseeable future, for which we have no commitments.
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In the future, we plan to try and raise additional capital through the issuance of additional common shares or Series A Preferred Shares. If we issue additional common shares, our then-existing shareholders may face substantial dilution. If we issue Series A Preferred Shares, we would be obligated to pay a substantial amount of interest which would reduce our cash available for working capital, property acquisitions and renovations. In addition, holders of Series A Preferred Shares would be entitled to be paid out of any assets we have in the event of any liquidation, dissolution or winding up of the corporation, before the holders of common share would be paid anything.
On February 6, 2012 we filed with the Securities Exchange Commission Form S-11 for the registration of our Series A Preferred Stock, $10 par value. The amount of shares to be registered is 2,500,000 with a proposed maximum offering share price of $10 per share. We cannot assure you that we will raise any funds pursuant to this securities offering.
Other than the registration of our Series A Preferred Stock mentioned above, we do not have any arrangements for any financing. We can provide no assurances to investors that we will be able to obtain any financing when required. The only cash currently available to us is the cash in our bank account. We have no other sources of capital.
No assurance can be given that we will obtain access to capital markets in the future or that adequate financing to satisfy the cash requirements of implementing our business strategies will be available on acceptable terms. Our inability to gain access to capital markets or obtain acceptable financing could have a material adverse effect upon the results of our operations and financial condition. Our failure to raise additional funds if needed in the future will adversely affect our business operations, which may require us to suspend our operations and lead you to lose your entire investment.
Although we anticipate generating operating cash flows in 2012, we do not expect to generate income due to the accounting required under land contracts (see Revenue Recognition). The extent of these losses will be contingent, in part, on the amount of gross profit we generate from the purchase, renovation and sale of any real estate transactions we are able to complete. It is likely that our operating losses will increase in the future and it is very possible we will never achieve or sustain profitability.
We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall or other unanticipated changes in our industry. Any failure by us to accurately make predictions would have a material adverse effect on our business, results of operations and financial condition.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Companys management, with the participation of the Companys Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2011. Based on this evaluation, the Companys Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2011 the Companys disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and is accumulated and communicated to the Companys
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management, including the Companys Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
This quarterly report does not include a report of managements assessment regarding internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
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PART II OTHER INFORMATION
Item 1.
Legal Proceedings.
Not applicable.
Item 1A.
Risk Factors.
Not Applicable.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Not Applicable.
Item 3.
Defaults Upon Senior Securities.
Not Applicable.
Item 4.
Mine Safety Disclosures.
Not Applicable.
Item 5.
Other Information.
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Item 6.
Exhibits.
SEC Reference | Title of |
|
Number | Document | Location |
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|
|
3.1 | Certificate of Incorporation | * |
3.2 | By-Laws | * |
3.3 | Articles of Amendment 2/22/10 | * |
3.4 | Articles of Amendment 11/28/10 | * |
3.5 | Articles of Amendment 2/6/12 | ** |
10.8 | Promissory Note | ** |
10.9 | Schedule of Omitted Promissory Notes | ** |
10.10 | Form of Land Contract | * |
10.11 | Form of Real Estate Agency Agreement | * |
14.1 | Code of Ethics | * |
31.1 | Certification of Co-Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
32.1 | Certification of Co-Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
*Incorporated by reference to Registration Statement on Form S-11 filed on December 1, 2010.
**Incorporated by reference to Registration Statement on Form S-11 filed on February 6, 2012.
All other Exhibits called for by Rule 601 of Regulation S-K are not applicable to this filing. Information pertaining to our common stock is contained in our Certificate of Incorporation and By-Laws.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
American Realty Funds Corporation | |
|
|
By: | /s/ Joel Wilson |
| Joel Wilson |
| Co- Principal Executive Officer Date: February 14, 2012 |
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American Realty Funds Corporation | |
|
|
By: | /s/ Joel Wilson |
| Joel Wilson |
| Principal Financial Officer Date: February 14, 2012 |
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